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Markets anxious about UK govt

May 09 2010 10:13

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London - Already-jittery markets will reopen on Monday hoping for a decisive result from Britain's power-sharing talks as they seek a stable government with the power to tackle the deficit and secure the recovery.

The opposition Conservatives won the most seats but without a parliamentary majority after Thursday's election, leaving Britain in limbo and sending the pound crashing to a 13-month low against the dollar. The FTSE 100 also fell.

Stocks and sterling recovered some of their losses by the end of the day, after Conservative leader David Cameron began talks with Nick Clegg, leader of the smaller Liberal Democrats, to see if they can form a government.

But the two parties will be acutely aware than any continuation of the uncertainty into next week could see a further fall in the currency and stock markets, already highly volatile because of the Greek debt crisis.

"Horsetrading and deliberation will increase the pressure on the pound," said Phil McHugh, a dealer at Currencies Direct, adding that any deal between the Tories and the Lib Dems could by contrast cause the pound to bounce.

"The financial markets and credit rating agencies will want to see action on the UK fiscal policy as a matter of priority," he added, while "procrastination and disagreement will lead us towards the path of a sovereign downgrade".

Prime Minister Gordon Brown - whose Labour party will stay in power until a new government is formed, despite coming second in the polls --sought to reassure the markets Friday that someone was still running the show.

He said British finance minister Alistair Darling was taking part in a G7 conference call on the deteriorating situation in the euro area that evening, and repeated his priority to secure recovery after a long and deep recession.

Tory leader Cameron also emphasised the "great seriousness" of the economic situation facing Britain, saying in his first speech after the results came in: "We need a government that reassures the international markets."

The hung parliament was not a huge surprise. Opinion polls had been pointing to a tight election for weeks and the markets will have factored in some delay in the formation of a new government.

Ratings agencies Moody's and Standard & Poor's kept their top-level credit ratings for the British economy after the results were called, saying a hung parliament in itself was not a problem.

One reason for calm is that the Conservatives, Labour and the Lib Dems have all pledged to tackle the deficit by slashing public spending, although they vary on timing, with the Tories wanting to start now and the others in 2011.

Many analysts now say it matters not so much whether the Tories agree a deal with the Lib Dems, or whether the Lib Dems turn back to Labour to try to prop up Brown's government, as long as someone forms a government soon.

"What we need is clarity of leadership as to where we're going to be taken," Jim O'Neill, chief economist at Goldman Sachs, told BBC radio.

Some commentators are mulling the possibility of a second election if no deal is reached, and this would only bring more uncertainty for the markets and delay the introduction of any firm programme to tackle the deficit.

"The UK's route to economic recovery needs to be firmly established," said Richard Lambert, director-general of the CBI business lobby group. "The next few days will be critical."

Much also depends on a European Union deal for a new crisis fund designed to head off market predators threatening the eurozone in the fall-out from the Greek crisis.

"If that fails then the whole global market will open on Monday in a really fragile state," O'Neill said, and any further uncertainty caused by Britain's politicians could create a situation that is "pretty ugly".

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